In a successful personal injury lawsuit, whether it settles out of court or goes all the way to trial, the defendant is ordered to pay the plaintiff compensation for the costs related to the injury. The defendant or the defendant’s insurer typically pays in a lump sum. In some cases, a plaintiff’s cash award is structured as a combination of a lump sum and an annuity, where a series of fixed payments are made over a certain period of time.

How does an annuity work?

Annuities are a kind of insurance product that guarantees a series of payments over the term of the annuity. The annuity might pay out over a beneficiary’s lifetime, or it may be tied to a certain amount of principal that continues to be paid to the beneficiary’s heirs until it is fully paid. The details of an annuity are highly flexible and can be negotiated as part of settlement discussions. The annuity’s total value, payment schedule, and many other details can be adjusted to meet the plaintiff’s needs.
Annuities are managed by specialized insurance firms. Because they are complicated financial instruments, annuities often need to be crafted with the help of accountants and other experts who can advise clients on how the value of payments will change over time. A $1,000 monthly payment today will be worth substantially more than the same amount in twenty years. Understanding this principle is a key part of evaluating whether an annuity is the right choice for the plaintiff to accept.

Why an annuity?

Annuities are often a component of a structured settlement, negotiated between the parties. They may come up in contexts where the defendant’s financial resources, including insurance, can’t cover a lump sum payment for the entire amount owed to the plaintiff. During negotiations it may become clear that the defendant’s alternatives are to provide an annuity or to declare bankruptcy in hopes of escaping an unmanageable debt. An annuity can be significantly cheaper than a lump sum payment because its cost is based on the future value of current dollars.
Plaintiffs may also prefer annuities to lump sums. A large lump sum payment can trigger significant tax consequences in some circumstances, resulting in a substantial loss of value. A lump sum also poses a practical and behavioral risk for the plaintiff. Someone who receives a check for $2 million may be tempted to spend the money on things other than medical care, even though medical bills are expected to continue to pile up for many years to come. By spreading out payments over a period of time the plaintiff often has an easier time managing the settlement funds. A potential downside of annuities is that if the company that provides the annuity goes out of business, the annuity will vanish.

GGRM is a Las Vegas personal injury law firm

For more than 45 years the law firm of Greenman Goldberg Raby Martinez has represented clients in personal injury cases. Our attorneys are available for free consultations to discuss your injury and your potential settlement options. We can be reached at 702-388-4476, or ask us to call you through our contact page.

The goal of a personal injury lawsuit is not to make the injured person rich. Rather, it is to ensure that the injured person doesn’t have to bear the cost of injuries caused by someone else’s negligence or misdeeds. Most lawsuits settle out of court, often with the result that the defendant enters into an agreement to make one or more payments. The payments may be made directly to health care providers who are owed for services already rendered, or they may go directly to the plaintiff to help offset the cost of future care or other damages. A key question is the extent to which settlement payments are taxable for federal tax purposes.
Predictably, the answer to the question of whether settlement payments are taxable income is: it depends. Specifically, the answer depends on the nature of the payments (i.e., what they are compensating the plaintiff for) and, sometimes, how the expenses they are covering were reported on prior tax returns. The IRS provides some insights in Publication 4345 with respect to certain specific types of compensation:

Medical expenses. The portion of a settlement that can be attributed to medical expenses related to the injury is not taxable unless expenses were included as an itemized deduction on a prior year’s tax return. If a deduction was taken that portion of the settlement may be taxable. Essentially, once a deduction is claimed a taxpayer can’t double up on recovery by also receiving a settlement payment for the deducted amount. For settlements covering multiple years of care, the taxpayer will need to follow a process to allocate the settlement across each year of expenses and make a report of income accordingly.

Emotional distress and mental anguish. As with medical expenses, noneconomic damages for emotional stress or mental anguish are not ordinarily taxable provided they originated from a physical injury or illness. This proviso is can create interesting questions if psychological harms covered by the settlement aren’t related to an injury itself but might be traced to another cause. Note, however, that such awards are subject to adjustments for related medical expenses (i.e., such expenses may still be deducted as usual).

Lost wages and lost profits. A settlement that includes a payment for lost wages or lost profits will be taxable in the same way as though those amounts were earned in the ordinary course of work. Lost wages are also subject to employment (social security and Medicare) taxes.

Interest. Many settlements are structured in such a way that the defendant pays a certain regular sum over a period of time. In a structured settlement the defendant often pays a certain interest rate on top of the principal. In such cases, the interest component of the payments is taxable income.

Property damage. If a settlement also includes compensation for property damage, it will be taxable only if the payments are greater than the taxpayer’s basis in the property. Basis is a tax term that in simple terms means the value that the taxpayer originally paid for the property, plus any costs paid into it. For example, a person who buys a valuable work of art for $5,000 has that amount of basis in the piece. If the art has appreciated to be worth $50,000 when it is destroyed, receiving compensation for the full value may trigger income tax for the $45,000 difference.

These rules only scratch the surface of the important tax considerations that can come up during a settlement negotiation. Making sure that a settlement is structured to minimize tax consequences is an important part of a personal injury attorney’s job. For more than 45 years the law firm of Greenman Goldberg Raby Martinez has represented Las Vegas clients in personal injury cases. For a free attorney consultation about your case call us at 702-388-4476 or contact us through our site.

The goal of most personal injury lawsuits is to make the injured plaintiff financially whole by requiring the person responsible for the injury to assume its associated costs. For a variety of reasons most personal injury disputes end up settling out of court. In filing suit the plaintiff makes claims for damages suffered in connection with the defendant’s negligence or other wrongdoing. Damages typically include medical bills and property losses. They also usually include lost earnings.
Plaintiffs who receive Supplemental Security Income, or SSI, can be surprised to learn that their personal injury settlement can affect their eligibility for continued payments under the SSI program. SSI is a program operated by the federal Social Security Administration that provides supplemental income to qualified individuals. To qualify an individual must, among other things, be disabled, blind, or over the age of 65. The individual must also “have limited income and resources.”
A straightforward cash payment as part of a personal injury settlement usually will push an individual out of qualifying under this second, asset-based requirement. An individual with qualified assets worth more than $2,000, or $3,000 for a married couple, is not eligible for SSI benefits. A significant number of personal assets are not included in this figure: the SSA does not count the value of a primary home, a vehicle, household goods, and business property. However, ordinary cash held in a checking or savings account does count toward the resources limit. As such, accepting a check in a settlement can instantly disqualify a plaintiff from continuing to receive SSI benefits.
The problem with this outcome is that the funds a plaintiff receives from a settlement generally need to be used straight away to pay off the costs associated with the plaintiff’s injuries. The settlement award is, therefore, not always a windfall but simply a way to pay down debts. If the award also renders the plaintiff ineligible for SSI benefits the effect can be the loss of significant and even vital monthly income.
One strategy for overcoming this problem is to create what is called a special needs trust to hold the settlement proceeds. Trusts are legal entities that are created by carefully preparing paperwork. The object of a special needs trust is to place strict limits on how the money in the trust can be used—in the case of an injury settlement, the usual purpose is to pay for expenses related to the plaintiff’s injury. By formally restricting how the plaintiff can use settlement funds a properly designed special needs trust can ensure that the settlement does not qualify as a “resource” that would disqualify the plaintiff for SSI benefits.
Problems like those faced by injured plaintiffs who receive SSI benefits are another good reason to work with an experienced personal injury law firm when pursuing a case. For more than 45 years the law firm of Greenman Goldberg Raby Martinez has represented Las Vegas clients in personal injury cases. If you receive SSI benefits and you have concerns about how your personal injury lawsuit may affect your eligibility, we are happy to discuss your case with you. For a free attorney consultation call 702-388-4476 or send us a request through our site.